July market update: Earnings, elections, economics 

In this month’s market update, Moneyfarm Chief Investment Officer Richard Flax discusses the critical topics shaping the financial landscape, including corporate earnings and  elections.

Financial assets have generally performed well over the past month, driven by US equities, while UK and European equities have lagged behind.

Once again, political elections have taken centre stage. We’ve seen a lot of uncertainty in France, with the more populist parties on both the left and the right showing a strong result. That had left European markets a bit jittery, particularly about the outlook for the government deficit in France. The second round of voting looks to have thrown up another surprise, with the left-wing coalition emerging as the largest party, but without a majority. That might reassure investors concerned about the emergence of a far left or far right majority, but any coalition government will likely be a fragile one. Financial markets can look favourably on political gridlock in the short-term, but ongoing political uncertainty in France probably won’t help reduce the budget deficit.

On the surface, the UK looked to be quite the contrast. Labour won a resounding majority, having run a campaign that focused on delivery and predictability. It doesn’t sound that exciting, but it will probably come as a welcome relief to British voters and probably investors as well. For us, the question of tax increases will be a key area of attention as the new government gets to work. Beneath the surface, however, we can see some of the same tensions we’ve seen in Europe. The three traditional parties in England won a low proportion of total votes. Independents and new parties (notably Reform) won a significant percentage of votes. Political fragmentation looks likely to be a feature of British politics in the coming years. We don’t think it’s an issue for investors in the short-term, but it’s something we’ll continue to monitor.

In the US, a poor performance in the Presidential debate has left investors wondering whether Joe Biden can, or should, be the Democratic nominee against Donald Trump. For now he shows no sign of stepping down, but a week is a long time in politics – as someone once said. Again, on the surface, perhaps we shouldn’t worry too much. In theory, both candidates have done the job already and financial markets have largely looked through the current noise. Political polarisation in the US has been a backdrop for financial markets for some time, and should be well understood. Nonetheless, it’s something we’ll continue to keep an eye on as we head to the election in November.

Turning to economics, we’ve seen some signs that the US economy is beginning to slow. Data from the labour market isn’t quite as strong as it was – even if it still points to a growing economy. On the whole, markets have digested this quite well. The data points to a so-called soft landing – slower growth without a recession. If that works out, we could see the Federal Reserve cut rates by more than the market had expected a month ago. Overall, we think that scenario would be positive for financial assets, even if the US market has done well recently.

Finally, as we’ve said before, analysts remain generally optimistic about the outlook for listed companies. Expectations for corporate earnings have generally been rising in the US and Europe, and that’s probably helped to support equity prices. Companies will start to report their results over the coming weeks and it’ll be a useful signpost, not just for how they’ve performed over the past few months, but how they see the rest of the year developing.